Finances

Major Issues in the Construction Industry

The construction industry is one of the major industries that contribute to a countries infrastructural and economic development (Seymour, 2019). It contributes to a significant proportion of a country’s national gross domestic product (GDP) annually (Holbrook, 2013). Moreover, the industry is essential in the generation of wealth, improvement of living standards of people working in the industry and linking the larger spectrum of economy with multiplier effects that facilitate the prosperity of other industries alongside (Bhavsar and Sangapurkar, 2018). However, despite its positive impact to the economy, the construction industry continues to face great challenges which significantly reduce its positive contribution and negatively impact the environment and the stakeholders involved (Spang, 2011). The purpose of the paper is to present, the major issues facing the construction industry in the local and national context, identify the short term and long-term impacts of the issues to the client, environment and the society, and provide practical management actions to address and mitigate the negative impacts and reduce the risks associated with the construction projects.

The major issues facing the construction industry in the local and international context are:

Finances are one of the major pain-points facing the construction industry in the recent years. Despite the effort being put in place by commercial banks and lending entities to provide loans to the construction industry at the lowest interest rate possible, most companies and organizations in the construction industry are yet to have positive cash flow (Tao and Xian-Yuan, 2018).

In most circumstances, the sub-contractors take care of the costs related to project development, payment of workers and suppliers (Alili, 2016). However, despite using their own funds in facilitating smooth and efficient running of the project, they are made to wait for payments from clients and major contractors who not seldomly dispute the payment after project completion (Boamah, 2017). This leads to stagnated growth of sub-contracting firms and loss of trust from workers who shift their attention to working for other unrelated industries. Other causes of delayed payment include stakeholder’s poor financial management, poor and inaccurate evaluation of work done by the contractor or by the sub-contractor, involvement of too many parties in the supply-chain, and insufficient documentation for valuation activities (Hua, 2013).

High insurance costs lead contractors to spending a huge chunk of their monetary resources in the payment of different types of insurance premiums (BognGan, 2018). For example, a lot of money is spent in settling of the general liability of delays and defects, and accidents in the construction industry. The cost of the premiums has been increasing on a day-to-day basis thereby crippling small and well-established construction firms especially in circumstances where they are not accounted for (Beckers and Stegemann, 2013). The short term and long-term impacts of lack of funds to a construction industry are:

Raw Materials Costs

The short-term impacts of insufficient fund and high insurance costs to the construction industry include:

• Inability to procure quality and correct raw materials on time.
• Delayed payments of workers and sub-contractors leading to their inability to provide for themselves and they people who depend on them.
• Delayed project starting time.

Prolonged lack of funds for a construction industry could lead to:

• Delayed competition time of the project since the project has to be stopped at each and every stage to seek more funding.
• Stagnated growth and collapse of contracting and sub-contracting firms due to unpaid dues from clients and developers.
• Loss of trust by stakeholders and tend to shift to other unrelated industries.
• In circumstances of prolonged lack of funds, collapse of the entire project is a possibility.

In the recent years, the cost of raw materials and assets that are primary to the construction industry has steeply grown, making less established construction industries be in a position of not being able to meet the construction demands (Clavero, 2019). The contractors suffer the problem of cost changes since most of the projects they engage in are comprise fixed price contracts and speculative home construction (Novotny, 2018). Moreover, sometimes the cost of raw materials changes rapidly from the time the project is beginning to the time the project is coming to an end, this leads to firm requiring the adjustment of budget through out the different phases of the project which leads to project delay and in the worst-case scenario, collapse of a construction project (Smith, Merna and Jobling, 2014).

These are issues that are related to the safety and security of the people working in a construction site, the equipment’s and other resources within the construction site. The application of equipment’s that are not entirely safe for the working personnel could lead to physical harm or death of workers. Moreover, security of construction is always an issue especially in areas that are prone to vandalism, terrorism and theft. Without safety and security guarantee in a construction site, the smooth and efficient running and completion of project is usually impossible.

Besides lack of safety and security within the site, another big issue facing the construction industry is the lack of safety training and poor safety training facilitated by the construction firms. The growth of competition and demand in the construction industry requires the firms to creatively come up with ways of increasing the profit margins while reducing the costs. Apparently, some companies cut costs by reducing their expenditure on safety equipment’s and training putting them at the risk of incurring heavy losses due to accidents, high insurance and litigation cost due to being uncompliant to building rules and regulations.

The short and long-term impacts of lack of safety and insecurity within a construction site are:

The short-term impacts of insecurity and lack of safety are:

• Loss of construction equipment’s and resources.
• Destruction of property.
• Physical harm on workers
• Unnecessary extensions of the project schedule.
• Unwarranted budget adjustments to account for the lost or vandalized resources.
• Unwillingness of workers to work in the site resulting to labor shortages.

The long-term impacts of insecurity and lack of safety are

• Delayed project completion time of collapse.
• Loss of lives of the workers within the site.
• Loss of resources within the construction site.
• Escalated cost of project completion due to the initially adjusted budget to cater for lost resources.
• Loss of economic value of the entire project due to unlikeliness of investors and tenants to occur the insecure premises.

The technology applied within most construction industries is constantly changing with time. The shift is aimed toward replacing manual equipment’s with smart automatic devices and would aid ease the construction process, boost productivity and hence the productivity levels of the industry. Some of the changes the construction industry is currently experiencing include the use of BIM software’s, telematics, robots, internet of things and other automation technologies (Chan, 2011). Despite these technologies having positive impact in the productivity and profit levels of the construction industries, most companies and organization within the industry are yet to come to terms with the technologies and are constantly resisting their adoption (Cartwright, 2017). For example, most companies still prefer conducting estimation processes and takeoffs using excel spreadsheets or manually using hand computations. However, the use of more streamlined and comprehensive estimation solution such as Cubit proves to be more efficient and accurate. This leads to poor competition with firms that have already adopted the technologies.

Safety and Security

General contractors and consultants who apply technology in their services allow sub-contractors to apply the same technology while undertaking the works assigned to them. However, subcontractors work for different consultants and general contractors who tend to use different kinds of technology. As a result, the sub-contractors can get overwhelmed in learning and applying different technologies to meet the needs of the consultants and general contractors. More sub-contractors use the general contractors and the consultant’s technology may disadvantage them when a dispute arises. In the case of a dispute, the consultant and the general consultant who own the technology and its documentation may revoke the sub-contractor’s access and edit information that may be important to set the sub-contractor free.

The negative impacts of failure to adopt technologies are:

• Prolonged project completion time.
• Utilization of too much resources in manual activities that would other wise been done cheaply using machines.
• Unnecessary subjective workers to unwarranted human labor.

• Loss of business to companies and firms that have adopted smart technologies.
• Loss of competitive powers in the fast-changing technology market.

The construction industry has always shown a positive growth through the years and despite the uptake of modern technology, it still heavily depends on manual labor. However, most of the workforce in the construction industry is ageing and there is a huge gap between fresh skills produced in learning institutions and the skills required in the work area. As a result, recruiters within the construction industry are having a hard time finding skilled labor to take up the roles within the different departs within the industry. Moreover, young intellectuals are finding construction jobs unlucrative and as a result are opting for other careers. Companies with “poor” incentive plans tend to lose the biggest proportion of skilled labor to firms with at least better incentive plans.

The short term and long-term impacts of shortage of skilled labor are:

• Delay in project schedule
• Poor quality work from unskilled labor and hence failure of project to meet the client’s expectations.

• Collapse of construction projects
• Collapse of construction firms
• Brain drains of skilled experts.

Other major issues facing the construction industry are:

In the recent couple of decades, the construction industry has experienced a steep growth leading to saturation. As a result, the competition is highly growing while the profit margins are heavily going down. Due to the reduced capability of securing contracts and the low profit margins incurred by organizations for secured contracts, most firms are finding it difficult to reinvest and update the needed business process and technology. Retarded productivity in the construction industry has been attributed to the time taken in logistics of material and personnel to and from the construction site, decisions by management to take early breaks, and decision on how to carry out work. Other factors that lead to poor productivity in the construction industry are inadequate planning and inadequate scheduling, poor collaboration by firms in the construction field offering different or similar services, labor shortage, fragmentation in the industry from working in silos and broken communication links between stakeholders.

Technology Adoption

These are issues relating to naturally occurring features that human-being of limited or no control over. They include factors such as floods, earthquakes, fires, poor landscape slope, poor land drainage and surface water. Despite a piece of land being economically potential for the development of a construction project, the project can be halted and made impossible by the presence of naturally occurring calamities within the area. Moreover, calamities can lead to destruction of already development projects and also jeopardize the health and safety of people living with the site. The negative short- and long-term impacts of natural calamities include making it impossible to develop economically potential projects, destruction of property and sometimes loss of lives.

Over the years the construction industry has been well known to assume enormous financial risks.  Most of the risk is suffered by the sub-contractor in charge of project completion. The sub-contractors increasingly win contracts but with very unfavorable terms to their business such as consequential impacts, liquidated damages and coverage of warranty (Shanthi, 2017). Without regard to other impacts that may affect the project, any delay to the completion of the project directly affects the contractors (Yates and Castro, 2018).

On the other hand, despite the sub-contractors winning contracts with unfavorable terms, there also a risk of the unwillingness of other stakeholders to abide and honor the terms of the contract. In some circumstances, the sub-contractor receives contracts that do not explicitly detail the important aspects of the project. Omission may lead the contractor to missing out the important aspects of the project, delay in project completion, adjustments which lead to the contractor performing extra work for no pay and in some cases failure of the project to meet the client expectations may paint a negative picture of the contractor in the eyes of clients. Furthermore, a completed project may fail to achieve the government agency approval criteria in circumstances where important aspects such as environmental and societal issues were omitted.

This are issues relating the environment surrounding the construction site. Most of the materials and machinery used in the construction industry despite having evolved over time are not entirely environmentally friendly. Most machinery used within the site require the use of gas for operation, a factor that results to the emission of green house gases to the atmosphere leading to air pollution (Damnjanovic and Reinschmidt, 2018). Moreover, the application of these machinery within the construction site produces a lot of unnecessary sounds leading to noise pollution. Some of the practices in the construction industry require digging and opening of earth masses, leading to open pits that hold stagnant water. The held stagnant water act as a breeding site of disease-causing pathogens such as mosquitoes thereby putting the health of the people leaving within these sites in a jeopardy (Dada, 2013). Besides, the emitted gases combine with rain water forming acid rain which directly affect the health of human being and animals and cause corrosion of building materials thereby reducing their life span (Jones, 2018).

Shortage of Skilled Labor

The adoption of green building technology to facilitate environmental protection has proved to more productive. However, most construction firms are yet to adopt the technology due to its association with high development, operation and maintenance cost (Longford and Retik, 2012). As a result, they stick to the use of conventional material and methods whose continued use over time result to land, air and water pollution.

Most construction firms in the current years are entering the market without a comprehensive business plan which covers the financial aspect, the operation aspect and the marketing aspect of their construction business (Seymour, 2019). This leads to construction firms lacking a clear perspective of the cash flow within the business and have no track of the man power and other asset utilization (Murray and Dainty, 2013). As a result, they tend to overestimate or underestimate their capabilities and fail to map out details of their project stages so that they can be on track.

On the other hand, uncontrolled growth results to most firms losing the sight of vision and capabilities. Due to uncontrollable growth most firms fail to keep up with the pace of demand and competition, thereby retarding their profit margins and the position in the market (Jones, 2018). A firm that does not plan its operation to within its budget will overspend to an extent it will not be in a position to meet the demands required of it by the construction market. This would eventually lead to collapse (Hua, 2013).

Management of risk requires that the construction firm adopt frameworks that facilitate the identification and resolution of all potential risks (Nichol, 2018). The process of risk management should begin with the analysis of the risk to understand the scope, the relationship between the issues and other construction factors and their severity. The next step should include evaluation of the risks to the rank them based on their severity. Those issues with high impact should be given the highest priority and sorted first (Moavenzadeh, 2014). The different practical management actions that can be adopted to address and mitigate the negative impacts of the factors discussed above include:

• Adoption of technology and utilization of materials that are environmentally friendly, sustainable and cost effective.
• Adoption of cheap technologies that make work easier and effective without compromising quality (Jackson, 2010).
• Properly plan resources, man power and operations in such a manner that fastens the project completion time without compromising quality, ensure low cost utilization and maximize the profit margins (Rihar, Zuzek, Berlec and Kusar, 2019).
• Contractors should maintain their own document management systems to protect them from disputes that may arise from general contractors and consultants (Senaratne and Sandanayake, 2012).
• Contractors should protect themselves from liquidated damages through proper tracking and documentation of lost hours, schedule changes, disruptions and delays.
• Contractors should ensure that all their employees and people operating within the site follow the required safety procedures and wear the recommended safety gears. The should ensure that safety forms inspection checklists are always completed.
• Contractors should adopt an operation model that integrates all the stake holders to facilitate improved communication, accountability and productivity (Winch, 2012).
• Contracting firms should develop mentorship and training programs with an aim of reducing the knowledge gap between the new skills entering the market and the already existing skills (Loosemore, Raftery, Reilly and Higgon, 2012).
• Before commitment to any contract, contractors should ensure that all terms and conditions of the contract are clearly stated any arising conflict of interest or dispute resolved prior to the commencement of the project.

Conclusion

The construction is an important industry that promotes a country’s infrastructural development. It contributes close to 20% of the worlds Gross Domestic Product (GDP). However, there challenges that inhibit the industries capability to exploit its full potential. This paper has highlighted some of the major challenges facing the construction industry and their short-term and long-term negative consequences. The issues include, undercapitalization, high insurance costs, environmental issues, safety and security issues among others. The paper has also highlighted the practical risk management actions that actions that construction firms should adopt to mitigate the negative impacts of the issues affecting them. The best practices that are worth being adopted are those promote the competitive power of the construction firms, ensure environmental protection, reduce cost and maximize profits without compromising quality.

Other Issues

References

Alili, B. 2016. Risk assessment in the implementation of construction projects in developing countries. 2016 UBT International Conference. doi:10.33107/ubt-ic.2016.73

Beckers, F., and Stegemann, U. 2013. A risk-management approach to a successful infrastructure project. Retrieved from https://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/a-risk-management-approach-to-a-successful-infrastructure-project

Bhavsar, V., and Sangapurkar, A. 2018. In what way does the construction sector contribute to economic growth? Empirical evidence from India. International journal of economic policy in emerging economies, 11(1/2), 141. doi:10.1504/ijepee.2018.091041

Boamah, F. A. 2017. Problems associated with material management. Practice in the construction industry. Munich, Germany: GRIN Verlag.

BognGan, H. 2018. Risk assessment and mitigation measures for green construction projects. Performance and Improvement of Green Construction Projects, pp. 211-233. doi:10.1016/b978-0-12-815483-0.00013-2

Cartwright, D. 2017. Top 10 challenges facing small construction companies. Retrieved from https://www.buildsoft.com.au/blog/top-10-challenges-facing-small-construction-companies

Chan, E. W. 2011. Action research: The use of enterprise resource planning system in construction engineering and project management. Journal of construction engineering and project management, 1(3), 18-27. doi:10.6106/jcepm.2011.1.3.018

Clavero, J. 2019. Top issues facing the construction industry in 2018. Retrieved from https://esub.com/top-issues-facing-the-construction-industry-in-2018/

Dada, M. 2013. Frequency of conflicts in construction project procurement: A correlation analysis. International journal of construction supply chain management, 3(1), 1-15. doi:10.14424/ijcscm301013-01-15

Damnjanovic, I., and Reinschmidt, K. 2018. Engineering and construction project risk management. Basingstoke, England: Springer.

Holbrook, E. 2013. Green construction risks and rewards. Retrieved from https://www.riskmanagementmonitor.com/green-construction-risks-and-rewards/

Hua, G. 2013. Implementing IT business strategy in the construction industry. Hershey, PA: IGI Global.

Jackson, B. J. 2010. Construction management Jump-start: The best first step toward a career in construction management. John Wiley and Sons.

Jones, K. 2018. 4 major challenges facing the construction industry. Retrieved from https://www.constructconnect.com/blog/4-major-challenges-facing-the-construction-industry

Langford, D., and Retik, A. 2012. The organization and management of construction: Managing the construction enterprise. London, England: Routledge.

Loosemore, M., Raftery, J., Reilly, C., and Higgon, D. 2012. Risk management in projects. 2nd ed. London, England: Routledge.

Moavenzadeh, F. 2014. Construction industry in developing countries. World Development, 6(1), 97-116. doi:10.1016/0305-750x (78)90027-x

Murray, M., and Dainty, A. 2013. Corporate social responsibility in the construction industry. London, England: Routledge.

Nichols, M. R. 2018. 6 problems the construction industry should resolve. Retrieved from https://born2invest.com/articles/problems-construction-industry/

Novotny, R. 2018. Top issues facing the construction industry in 2019. Retrieved from https://esub.com/top-issues-facing-the-construction-industry-in-2019/

Rihar, L., Zuzek, T., Berlec, T., and Kusar, J. 2019. Standard risk management model for infrastructure Projects. Risk Management in Construction Projects. doi:10.5772/intechopen.83389

Senaratne, S., and Sandanayake, Y. G. 2012. World construction conference 2012: Global challenges in construction industry.

Seymour, H. 2019. An economic overview of the construction industry. The multinational construction industry, 58-84. doi:10.4324/9780367351700-3

Shanthi., J. 2017. Challenges faced by the construction manager in the construction industry. International journal of advanced research, 5(7), 227-233. doi:10.21474/ijar01/4710

Smith, N. J., Merna, T., and Jobling, P. 2014. Managing risk in construction projects. Hoboken, NJ: John Wiley & Sons.

Spang, K. 2011. Integrated risk management in infrastructure projects. Modern Methods and Advances in Structural Engineering and Construction. doi:10.3850/978-981-08-7920-4_s1-r13-cd

Tao, X., and Xiang-Yuan, S. 2018. Identification of risk in green building projects based on the perspective of sustainability. IOP Conference Series: Materials Science and Engineering, pp. 439-450, 032053. doi:10.1088/1757-899x/439/3/032053

Williams, P. 2015. Managing measurement Risk in Building and Civil Engineering. 3rd ed. Hoboken, NJ: John Wiley & Sons.

Winch, G. M. 2012. Managing construction projects. Hoboken, NJ: John Wiley & Sons.

Yates, J., and Castro, D. L. 2018. Sustainability issues in the engineering and construction industry. Sustainability in engineering design and construction, 37-65. doi:10.1201/9781315368665-3